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Foreign Reserves to Rise on $2.5b Eurobond Issuance

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  • Foreign Reserves to Rising on $2.5b Eurobond Issuance

Nigeria’s 42.8 billion external reserves will go up, with the successful issuance of the $2.5 billion Eurobond offer, a report said at the weekend.

Besides, cumulative transactions in the Investors’ & Exporters’ (I&E) forex window have hit $20 billion, said one of the reports on the economy released by two investment and research firms at the weekend.

They said Nigeria is showing signs of recovery after a difficult economic period that followed historically low oil prices, a currency devaluation, and high inflation.

Afrinvest West Africa Limited’s report said the $2.5 billion Eurobond cash raised by the Federal Government to refinance maturing short term local debt securities will push foreign reserves to new heights. “We expect further accretion to external reserves currently at a 48-month high of $42.8 billion with positive feedback on the Central Bank of Nigeria’s (CBN’s) ability to sustain foreign exchange intervention sales,” it said.

External reserve was $40.4 billion last December. The last time the foreign reserves hit the $40 billion mark was January 2014, about five months before the crash in global oil prices. In September 2008, the country’s foreign exchange reserves hit $62 billion, with the Federal Government spending $12 billion from it to settle external debts.

The report said that despite downside risks of volatility in the oil market and political uncertainty, the short term positive outlook on forex market stability and liquidity remains intact.

Another report from Exotic Capital titled: ‘Fragile Recovery, Positive Outlook’, also released at the weekend, said that Nigeria’s forex regime, although still far from ideal, had begun to stabilise.

“A multiple currency regime evolved after the oil price fall in 2014 and the June 2016 devaluation, which led to a widening divergence between the official and parallel markets (the parallel market premium reached 100 per cent in January 2017). The current regime has shown a vast improvement this year with introduction of the I&E Forex window last April,” it said.

It said the parallel rate for naira is in the N360 to N365 range, nearly identical to the I&E Forex window rate used for international investors as well as importers and exporters, and has seen close to $20 billion in cumulative transactions since its introduction.

The Exotic Capital report said that despite the relative successes of the I&E Forex window, the current forex regime of multiple windows has hurt, and will continue to hurt, the economy over the medium term. “Not only does it create economic distortions (leading to market inefficiencies and dead-weight loss), it also builds mistrust among market participants who fear that competitors were able to access forex at different rates, doing little to create transparency and move the economy forward,” it said.

“Furthermore, we suspect that long-term domestic investment has been hampered as uncertainty looms not only over the future value of the currency but also over the regime. Nevertheless, we do not expect the CBN to make any major forex adjustments ahead of the 2019 presidential election unless oil prices / production falls again (as that would hinder its ability to supply forex to meet demand),” the report added.

It doubted the possibility of the CBN adopting market-determined rate (free float), but “as an interim approach, it could consider unifying its multiple rates around the I&E Forex window rate, which we think would help it to attract more portfolio and direct investment, as well as mitigating some of the previously-discussed issues”, the report.

Market data showed that CBN last week continued its weekly forex interventions, injecting $100 million on Monday via wholesale SMIS intervention.

A total of $55 million was auctioned at the Small and Medium Enterprises (SMEs) segment while $55 million was sold to satisfy retail invisible demand (Tuition fee, medical payments and Business Travel Allowance).

The forex rates traded within a tight band at all segments of the market with the CBN official spot rate trading flat all week after initial five kobo depreciation on Monday to N305.90/$1.00.C

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Economy

Goldman Sachs Urges Bold Rate Hike as Naira Weakens and Inflation Soars

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Central Bank of Nigeria (CBN)

As Nigeria grapples with soaring inflation and a faltering naira, Goldman Sachs is calling for a substantial increase in interest rates to stabilize the economy and restore investor confidence.

The global investment bank’s recommendation comes ahead of the Central Bank of Nigeria’s (CBN) key monetary policy decision, set to be announced on Tuesday.

Goldman Sachs economists, including Andrew Matheny, argue that incremental rate adjustments will not be sufficient to address the country’s deepening economic challenges.

“Another 50 or 100 basis points is certainly not going to move the needle in the eyes of an investor,” Matheny stated. “Nigeria needs a bold, decisive move to curb inflation and regain investor trust.”

The CBN, under the leadership of Governor Olayemi Cardoso, is anticipated to raise interest rates by 75 basis points to 27% in its upcoming meeting.

This would mark a continuation of the aggressive tightening campaign that began in May 2022, which has seen rates increase by 14.75 percentage points.

Despite this, inflation has remained stubbornly high, highlighting the need for more substantial measures.

The current economic landscape is marked by severe challenges. The naira’s depreciation has led to higher import costs, fueling inflation and eroding consumer purchasing power.

The CBN has attempted to ease the currency’s scarcity by selling dollars to local foreign exchange bureaus, but these efforts have yet to stabilize the naira significantly.

“Developments since the last meeting have definitely been hawkish,” noted Matheny. “The naira has weakened further, exacerbating inflationary pressures. The CBN’s policy needs to reflect this reality more aggressively.”

In response to the persistent inflation and naira weakness, analysts are urging the central bank to implement a more coherent strategy to manage the currency and inflation.

James Marshall of Promeritum Investment Management LLP suggested that the CBN should actively participate in the foreign exchange market to mitigate the naira’s volatility and restore market confidence.

“The central bank needs to be a more consistent and active participant in the forex market,” Marshall said. “A clear strategy to address the naira’s weakness is crucial for stabilizing the economy.”

The CBN’s decision will come as the country faces a critical period. With inflation expected to slow due to favorable comparisons with the previous year and new measures to reduce food costs, including a temporary import duty waiver on wheat and corn, there is hope that the economic situation may improve.

However, analysts anticipate that the CBN will need to implement one final rate hike to solidify inflation’s slowdown and restore positive real rates.

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Economy

Currency Drop Spurs Discount Dilemma in Cairo’s Markets

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Egyptian pound

Under Cairo’s scorching sun, the bustling streets reveal an unexpected twist in dramatic price drops on big-ticket items like cars and appliances.

Following March’s significant currency devaluation, prices for these goods have plunged, leaving consumers hesitant to make purchases amid hopes for even better deals.

Mohamed Yassin, a furniture store vendor, said “People just inquire about prices. They’re afraid to buy in case prices drop further.” This cautious consumer behavior is posing challenges for Egypt’s consumer-driven economy.

In March, Egyptian authorities devalued the pound by nearly 40% to stabilize an economy teetering on the edge. While such moves often lead to inflation spikes, Egypt’s case has been unusual.

Unlike other nations like Nigeria or Argentina, where costs soared post-devaluation, Egypt is witnessing falling prices for high-value items.

Previously inflated prices were driven by a black market in foreign currency, where importers secured dollars at exorbitant rates, passing costs onto consumers.

Now, with the pound stabilizing and foreign currency more accessible, retailers are struggling to sell inventory at pre-devaluation prices.

Despite price reductions, the overall consumer market remains sluggish. The automotive sector has seen a near 75% drop in sales compared to pre-crisis levels.

Major brands like Hyundai and Volkswagen have slashed prices by about a quarter, yet buyers remain cautious.

The economic strain is not limited to luxury items. Everyday expenses continue to rise, albeit more slowly, with anticipated hikes in electricity and fuel prices adding to the pressure.

Experts highlight a period of adjustment as both consumers and traders navigate the volatile exchange-rate environment. Mohamed Abu Basha, head of research at EFG Hermes, explains, “The market is taking time to absorb recent fluctuations.”

Meanwhile, businesses face declining sales, impacting their ability to manage operating costs. Yassin’s store has offered discounts of up to 50% yet remains quiet. “We’ve tried everything, but everyone is waiting,” he laments.

The devaluation has spurred a shift in economic dynamics. Inflation has eased, but the pace varies across sectors. Clothing and transportation costs are up, while food prices fluctuate.

With the phasing out of fuel subsidies and potential electricity price increases, Egyptians are bracing for further financial strain. The recent 300% rise in subsidized bread prices adds another layer of concern.

The situation underscores the balancing act between maintaining consumer confidence and attracting foreign investment.

Economists suggest potential stimulus measures, such as lowering interest rates or increasing public spending, to boost demand.

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Economy

MPC Meeting on July 22-23 to Tackle Inflation as Rates Set to Rise Again

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Interbank rate

The Monetary Policy Committee (MPC) is set to convene on July 22-23, 2024, amid soaring inflation and economic challenges in Nigeria.

Led by Olayemi Cardoso, the committee has already increased interest rates three times this year, raising them by 750 basis points to 26.25 percent.

Nigeria’s annual inflation rate climbed to 34.19 percent in June, driven by rising food prices. Despite these pressures, the Central Bank of Nigeria (CBN) projects that inflation will moderate to around 21.40 percent by year-end.

Market analysts expect a further rate hike as the committee seeks to rein in inflation. Nabila Mohammed from Chapel Hill Denham anticipates a 50–75 basis point increase.

Similarly, Coronation Research forecasts a potential rise of 50 to 100 basis points, given the recent uptick in inflation.

The food inflation rate reached 40.87 percent in June, exacerbated by security issues in key agricultural regions.

Essential commodities such as millet, garri, and yams have seen significant price hikes, impacting household budgets and savings.

As the MPC meets, the National Bureau of Statistics is set to release data on selected food prices for June, providing further insights into the inflationary trends affecting Nigerians.

The upcoming MPC meeting will be crucial in determining the trajectory of Nigeria’s monetary policy as the government grapples with economic instability.

The focus remains on balancing inflation control with economic growth to ensure stability in Africa’s largest economy.

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